The European Commission has recently ordered multinational tech giant Apple, Inc. to pay €13 billion to Ireland to settle back tax debt. The EC concluded that the deal made between Apple and Ireland was illegal and aided Apple in avoiding its proper tax liability. Though it is not the largest corporate back tax bill by a long shot, this tax bill will certainly spell substantial changes in the way Apple conducts its tax affairs.

Commissioner Margrethe Vestager determined that the Irish deal enabled Apple to pay an effective tax rate of just 1 percent on its European profits in 2003, and that this sunk to just 0.005 percent in 2014. The European authorities have put Ireland in charge of recovering the €13 billion (approximately $14.6 billion) from Apple.

This new tax bill can accurately be perceived as an inevitable consequence of Apple’s practice of using creative accounting strategies to avoid tax obligations.

Context

Apple has used three primary methods to minimize its tax burden: deferral, transfer pricing and check-the-box. Deferral simply allows U.S. firms to avoid paying U.S. tax on income earned abroad until it is physically returned to the states. In reality, companies often keep international earnings offshore indefinitely and thus avoid paying tax altogether. Transfer pricing is a bookkeeping method used by companies to distribute expenses among their affiliates. Apple is able to utilize transfer pricing to its benefit by charging small fees to foreign subsidiaries for use of its intellectual property; in this way, Apple maximizes the profits of its affiliates and minimizes its intellectual property income in the U.S. Check-the-box allows firms to classify their affiliates as “disregarded entities” which are not subject to U.S. income tax.

The deal struck with Ireland further enhanced the effectiveness of these strategies. Apple set up two entities in Ireland through which it was able to channel two-thirds of its pre-tax global income. The income which passed through these Irish entities did not return back to Apple but was instead routed to the U.S.-based bank accounts of these entities. This allowed the income to avoid U.S. tax.

Final Thoughts

The European Union is trying diligently to crack down on faulty agreements between multinational firms and EU member states. European authorities have already ordered the Dutch government to recover €30 million from Starbucks and demanded that Luxembourg recover roughly the same amount from Fiat Chrysler. Both Amazon and McDonald’s are also likely to face similar treatment in the near future as a result of their dealings with Luxembourg. Though creative accounting will almost certainly continue well into the future, it appears that European authorities will take an increasingly aggressive approach to enforcing EU tax laws.

Apple certainly has the cash to settle its tax bill. And its relationship with Ireland is likely to suffer little as Ireland still has a relatively low corporate tax rate of 12.5 percent. However, it seems clear that Apple will have to employ cleverer strategies in the future in order to dodge the European taxman.

Tax issues in the corporate world are plentiful. If you’re a current or future business owner interested in learning about how entity selection can help your tax liability you should view this presentation by our principal John Huddleston

With total earnings of approximately $74.5 billion for 2015, Google is truly a multinational corporate juggernaut. International sales constitute a substantial portion of Google’s overall revenue source. Presently, sales in the United Kingdom make up about a tenth of Google’s entire income. In recent years, a controversy has developed over Google’s supposed attempts to divert profits in an effort to avoid paying the typical corporate tax rate for U.K. sales. The standard corporate tax rate in the United Kingdom is 20 percent. By way of a host of creative strategies, Google has historically paid nothing close to this rate. Two recent developments — a settlement regarding Google’s back tax debt and a law passed by the British parliament — have helped create a measure of progress, but the matter remains far from fully resolved.

In the last three years, Google has managed to keep its effective tax rate on foreign (i.e. non-U.S.) profits at 6.6 percent. There appears to be some uncertainty over the exact rate paid by Google in the United Kingdom: some allege the rate is as low as 2.5 percent, although Matt Brittin, Google’s president in Europe, states that the rate is much higher.

Back Tax Deal

In January of 2015, a settlement was reached regarding Google’s past tax liability stretching back to 2005. Google agreed to a sum of $130 million (approximately £190 million). While many cite the deal as a clear triumph for the British government, many others see it as overly gentle on Google. Though the issue of profit shifting still lingers, this settlement brought at least some degree of satisfaction for the U.K.

Diverted Profits Tax

In its Finance Act of 2015, the British government included a provision called the Diverted Profits Tax — informally referred to as the Google Tax — which attempts to shut down the improper shifting of profits to offshore tax havens. In the past, Google has avoided paying the standard corporate tax rate on most of its U.K. profits due to its practice of shifting these profits to other venues, primarily Bermuda. The Diverted Profits Tax will attempt to halt this practice and implement a 25 percent tax rate on funds being shifted in this fashion.

There is uncertainty whether Google will comply with the law as Google contends that it already pays its fair share of taxes in the U.K. Only time will reveal precisely how the matter will be settled.

Supposedly, death and taxes are two things that no one can escape. While the saying may be true, tax bills are often less financially damaging than you may think. Here are some reasons your tax bill is actually not that bad.

Most Other Developed Countries Pay More

In a large number of European countries, the tax burden is much heavier than in the United States. More than 20 developed countries have taxes that are above the average rate in the United States. In the U.S. the average earning adult will pay around 30% to taxes. This includes federal, state, Social Security, and other collected taxes. Some countries such as France pay a hefty 50% in taxes to their governments.

Plenty of Write Offs are Possible

One of the great things about the United States tax system is that there are a number of write offs and deductions. Everything from medical to school bills to business gifts can be written off as losses for lower taxes. With the amount of taxes that are collected and the ability to write off, most people come out not paying much to Uncle Sam at all.

Savings Helps

Putting money into a 529 college plan or a retirement fund can decrease your tax bill. This allows you to keep money on hand to use for expensive occasion and actually shelter that money from being taxed. With the ability to save to reduce taxation, your tax bill is less awful than you may think at first.

Sales Tax is a Deduction

If you bought some hefty items, consider deducting sales tax. Sales tax can count as a write off during tax time, which may allow you to decrease your bill. Lowering your tax bill based on the taxes you have already paid is a great way transfer your tax load from all at once, to day to day.

Have you ever wondered how income is taxed throughout the world? If so, today you are in luck because that is our hot topic for today. Continue reading and be amazed.

Moscow

In Russia, citizens have a flat income tax and no social security tax, unless they are self-employed. Employers are responsible for 30% of the total payroll for taxes. Dividend income is taxed at a 9% tax rate and interest income that is higher than 5% ROI has a 35% tax rate. Overall, the flat tax rate that individuals are able to take advantage of is very beneficial for those who have a high income.

Hong Kong

Hong Kong does not put a tax on imports, good and services, sales, income earned abroad, exports, interest, or capital gains. Their highest marginal rate is 17%, but personal income taxes have a cap of 15%.

Tokyo

Many Japanese citizens do not have to file a tax return. Employers withhold all income taxes; therefore, unless they make a large amount of money from freelancing they don’t have to do taxes. Income is subject to a 4% prefectural tax and a 6% municipal tax though. However, they get to take deductions for large expenses and social security tax ranges from 5-7% of their income.

Closing Thoughts

From these three places, we can see that different countries have different rules for taxes. However, everyone, regardless of their country of residence, has to deal with taxes in some form or another. Paying taxes is universal, it’s only the tax rates and laws that differ.